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Gopika Juneja, Lovely Professional University Unit 13: Decision Involving Alternative Choices

Unit 13: Decision Involving Alternative Choices Notes

CONTENTS
Objectives
Introduction
13.1 Concept of Decision-making
13.2 Determination of Sales Mix
13.3 Make or Buy Decisions

13.4 Own or Hire
13.5 Shut Down or Continue
13.6 Summary
13.7 Keywords
13.8 Self Assessment
13.9 Review Questions
13.10 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the concept of marginal costing decisions
Take decisions like makes or buy, own or hire and shut down or continue etc.

Introduction

The need for a decision arises in business because a manager is faced with a problem and
alternative courses of action are available. A manager have to take different decisions like make
or buy, continue or shut down, etc. to make the maximum profit. In deciding which option to
choose he will need all the information which is relevant to his decision; and he must have some
criterion on the basis of which he can choose the best alternative. Some of the factors affecting
the decision may not be expressed in monetary value. Hence, the manager will have to make
‘qualitative’ judgements, e.g. in deciding which of two personnel should be promoted to a
managerial position. A ‘quantitative’ decision, on the other hand, is possible when the various
factors, and relationships between them, are measurable.

13.1 Concept of Decision-making

Marginal cost helps management to make decision involving consideration of cost and
revenue.Basically, marginal costing furnishes information regarding additional costs to be
incurred if anadditional activity is to be taken up or the saving in costs which may be expected
if an activityis given up. This can be compared with the benefit expected from the proposed
course of actionand thus the management will be able to take the appropriate decision.
Decision-making describes the process by which a course of action is selected as the way to
dealwith a specific problem. A decision involves the act of choice and the alternative chosen out
ofthe available alternatives.

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